Is Letter Of Intent To Purchase Business Mandatory

Is Letter Of Intent To Purchase Business Mandatory 

Letter of intent to purchase could be an important instrument for your business acquisition. In order to have discussions with the seller, it is a general practice to sign confidentiality agreements and prepare a letter of intent.

While ensuring your interest in the business acquisition, these documents will come as handy for the upcoming negotiations acting as the basic intent of the party as well as protecting the sensitive information of the target and the seller.

In order to draft a document providing optimal protection for each party, following points mentioned should be kept in mind. In order to have a letter of intent to purchase business  drafted according to your interests as well as without any loopholes, it is important that you appoint an experienced corporate lawyer. 

Purpose of a Letter of Intent (LOI)

Letters of intent may be used by different parties for many purposes. Parties can use an LOI to outline some of the basic, fundamental terms of an agreement before they negotiate and finalize all the fine points and details. Furthermore, the LOI may be used to signal that two parties are negotiating a deal such as a merger or joint venture.

Overall, LOIs aim to achieve the following:

  • Clarify which key points of a deal must be negotiated.
  • Protect all parties involved in the deal.
  • Announce the nature of the deal, such as a joint venture or a merger between two companies.

Confidentiality agreement

A letter of intent of purchase or any other business dealing is very often preceded by a confidentiality agreement aiming to protect the information as well as the documents belonging to both parties. It includes financial data, customer and supplier lists, and intellectual property information which shall be communicated in the due diligence process.

A confidentiality agreement is important for a potential buyer to have access to the information he or she needs to formulate a letter of intent, to make an offer or to withdraw  some interest, if any. The potential buyer will agree therefore, that such  information could be used for the purposes of evaluating the proposed transaction only.

The letter of intent

A letter of intent would generally act as a catalyst to advance the process for acquisition or a joint development agreement.

The document would reassure the seller of the buyer’s willingness to submit a potential bid, would help lay down  key elements of the transaction and, when required, shall also assure a period of exclusivity during the negotiations.

The document is of legal nature; but the letter of legal intent is not intended to be fully binding, unless otherwise stipulated in an expressed manner.

At this stage of the negotiations, the buyer and the seller do not have to make an official offer to proceed with a transaction. However, still a letter of intent would create binding obligations on one party or the other, particularly in regard to confidentiality and exclusivity regarding the said business transaction.

Clauses which shall be included in a letter of intent

A letter of intent will include general clauses as well as some specific clauses, which may  include-

  • nature of the proposed transaction between the parties 
  • identification of the people involved with the transaction
  • price range decided for the acquisition, subject to amendment and the terms of the payment decided later on after the due diligence process is completed
  • the period during which the seller agrees not to solicit or consider offers from others for purchase without previously speaking with the buyer as well as the penalties associated with breaching the commitment shall be mentioned in the letter of intent.
  • Condition that the buyer may withdraw from the business process at any time in case the transaction will not provide the expected gains will be included in the letter of intent as well
  • usual closing conditions of a business transaction

A document having legal weight

Even if a letter of intent is not intended to create contractual obligation on the parties to close a deal, it does not mean that a letter of legal intent does not have a legal weight.

It is, therefore, advised to contact an advocate specialising in corporate law from the initial stage itself, who can provide a good legal framework so that documents correspond perfectly to your intentions.

After the main points of concern have been listed in the letter of intent, it would be time to proceed with the required process. After which one would be able to write the final agreements leading to closing the acquisition.

Lead India offers you a team of experienced corporate lawyers who have been assisting businesses with various procedures and processes related to the business law. Thus, if you wish to talk to a lawyer or seek free legal advice online, you may contact us.